file was not copied to the iPod because it cannot be played on this iPod

Hi,
   I'm a complete newb with the first generation iPod Touch. It's my wife's and I don't use it but I wanted to experiement with giving her access to some movies. As an experiment I've encoded 1 chapter of a movie on my Linux box using Handbrake using the iPhone & iPod Touch preset. The file is about 7MB. It plays fine on the Linux box. I've copied it over to my Windows machine, have my wife's iPod Touch hooked up and it's visible in iTunes. I select the video directory for the iPod in iTunes and then try dragging the video file into iTunes. At this point I'm presented the message:
<file> was not copied to the iPod <iPod name> because it cannot be played on this iPod.
   In searching the forums it seems that one potential solution is to choose Advanced->Create iPod or iPhone version which unfortunately is grayed out an unselectable. I suspect that this is because I don't have the video file inside of iTunes, but I'm not sure about that.
   When I choose Library->Movies I just get a few options about renting and downloading that take me to the iTunes store.
   How do I get this video into iTunes so that I can try to get it onto the iPod?
Thanks,
Mark

As a follow-up I talked to my son who has an iPod and he tells me that, assuming I understood him correctly, when I open iTunes and choose Library->Movies I should see something like a file browser, and that when I drag the video from my desktop into iTunes I should see it there in the browser.
I currently am not seeing anything that looks like a file browser, but something more like an adversitisement for capabilities of iTunes and the iTunes store. I've got a green shopping bag that has some text to the right saying 'Download movies' and to the right of that some green tickets to the right with text that says 'Rent movies'.
I understand that I want to use the iTunes converter in the advanced menu, but I haven't figured out how to use that on a random file like the m4v file on my desktop.
Thanks

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